5. Within-firm risk and beta risk AaAa Understanding risks that affect projects
ID: 2800583 • Letter: 5
Question
5. Within-firm risk and beta risk AaAa Understanding risks that affect projects and the impact of risk consideration WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company's projects tends to vary a great deal from project to project. If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply The firm will become less risky. The firm will make poor capital budgeting decisions that could jeopardize the long-run viability of the company The firm will reject too many relatively safe projects. How do managers typically deal with within-firm risk and beta risk when they are evaluating a potential project? Quantitatively O SubjectivelyExplanation / Answer
a.
if WSP Inc. does not risk adjust its discount for specific projects properly then the firm reject Too many relatively safe projects and the firm will make poor capital budgeting decision that could Geoparsing the long run Viability of the company.
Option (B) and option (C) is correct answer.
b.
Within firm risk is measured by standard deviation and market risk is measured in term of beta. Manages typically deal with within firm risk and beta risk Quantitatively when they are evaluating project.
c.
Standard deviation of project A is higher than standard deviation of project B, so project A has more, firm specific risk than project B. Again, beta of project B is higher than beta of project A , so market risk of project B is higher than market risk of project A. Correlation coefficient of project B is higher Correlation coefficient of project A, so project A is more corporate risk than project B.
Option (A), Option (C) and Option (D) is correct answer.
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